Opinion: The economy and markets can be OK even when the president is a moron

TimMullaney

Writer

As Washington spend its early fall tittering and twittering about whether the secretary of state called President Donald Trump a moron, the mailbox yields this courtesy of Goldman Sachs, whose sin is merely saying something that seems to reflect how people are trading:

“Progress toward tax reform creates earnings upside and gives new life to Trump trades,” reads the headline on strategist Ben Snider’s latest. The chances of tax reform passing are 65%, he says.

The market’s push since the outline of the plan was released in late September ”suggests investors are already pricing in passage, as companies with high tax rates, cyclical stocks and value stocks outperform the market’s recent rise. One of the underperformers is Goldman’s basket of stocks that do lots of share buybacks — a big beneficiary of the Trump administration’s still-being-written proposal for a $2 trillion tax cut.

The nice instinct here is to explain why this is probably too rosy a scenario.

Or, put in a way that Trump might understand: Whaddayou, a moron?

Most reporting coming out of Washington is emphasizing that the proposal is already in big trouble, even before the full bill is released.

Reports from the Tax Policy Center suggest that it may impose a tax increase on as many as one-third of middle-class families, and 60% of upper-middle class households.

House incumbents from California and the Northeast won’t tolerate the draft proposal’s call to end the deductibility of state and local taxes from federal taxable income, so the biggest loophole Republicans wanted to close to pay for a corporate tax cut is likely to soon be off the table, making tax “reform” an even bigger fiscal sinkhole than it is now.

But at bottom the bill will remain what it is: A tool to redistribute after-tax income to corporations and wealthy individuals, paid for with deficit spending and loss of tax breaks aimed at individuals, mostly the middle and upper-middle classes, after decades of income growth moving steadily toward the already-comfortable.

And it will have to pass, Snider says, in an election year. 65% chance? Not in a Senate where Rand Paul of Kentucky and Bob Corker of Tennessee are already sounding warnings. As for the rest of the pillars of the Trump trade, like an infrastructure bill that will never pass and rollback of Dodd-Frank and the consumer protections it imposed after the 2008 mortgage crisis, Goldman didn’t even mention those.

The numbers from Wall Street suggest investors are taking even the tax proposal less seriously.

Here’s the math: Snider calculates that the tax proposal would boost the profits of the S&P 500 companies by about $17 per aggregate share, or 12%, to $156. (A weaker version would add $9 a share to after-tax earnings, he writes). With the index trading at 19 times 2017 earnings, an extra $17 a share implies a 320-point gain. A 65% chance of this happening would be worth 200 or so points.

Yet the S&P 500’s
SPX, -1.18%
gain since the bill’s outline was released is just 56 points, plus or minus. And there’s been solid economic data, especially a strong reading on service-sector growth, that explain the gains better. Friday’s announcement that the economy lost 33,000 jobs in September weakens the picture, but not much, since that was caused by hurricanes closing businesses temporarily. And wage growth was solid.

(I’d be remiss not to note this is the first monthly loss since February 2010, when the “job-killing Obamacare” law passed.)

Here’s an alternate explanation for the market’s strength: A CNBC poll that puts Trump’s approval rating at 38%, despite the best readings on consumers’ view of the economy in 10 years. With only 43% approving of his handling of the economy, voters think Trump has little to do with the improvement they see, and expect to see in the future.

That has the modest benefit of being true. Growth in the first half of this year was about the same as in 2014 and 2015. Trump hasn’t passed much, hasn’t changed much, and his low ratings belies his claim that The Donald’s mere presence revives animal spirits. Consumers are responding to the fact that the gradual growth of the economy is gradually mopping up the excess capacity that has held down middle-class pay, that’s all.

F. Scott Fitzgerald said the sign of a first-rate intelligence was the ability to understand two seemingly opposite ideas and retain the ability to function. The two opposite ideas here are that the economy can be OK even when the president is a moron, the latter a contribution to political understanding destined to grace the first sentence of Rex Tillerson’s obituary. Maybe fine enough to sustain that big ol’ 2% stock gain since the tax proposal became public.

Against much recent evidence, the American people may have a first-rate intelligence after all.

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